Managing Financial Risks Key in Unlocking Farmer Investments Burkina Faso
STORY | Agricultural finance has never really taken off in Burkina Faso. This is partly because microfinance institutions (MFIs) don’t have the proper tools to manage risks specific to agricultural finance. These risks are particularly present in a country that struggles with the effects of climate change causing erratic rainfall and bad harvests. By supporting MFIs to better manage their risks, STARS aims to unlock investments in the agricultural sector.
Access to Finance
Many people in Burkina Faso are not used to accessing formal financial services. Less than 25 percent of Burkina’s population has a savings account at a financial institution and less than 10 percent has access to a loan. Access to finance is particularly constrained for those in rural areas, women, and lower-income individuals.
For Hamma Lankoandé, sesame producer in Tambiga, a small town in the eastern part of the land-locked country, this meant that investing in his farm was never really an option. “I have never received a loan because the microfinance institution near my village refused to finance the sesame value chain. They considered it too risky,” Mr. Lankoande says.
Agricultural risks related to pests, weak agricultural practices, low quality inputs and lack of storage facilities are risky for farmers and microfinance institutions (MFIs). To add to the complications; Burkina Faso suffers from a security situation that is quickly deteriorating. But despite the challenging context, agriculture provides enormous opportunities for banks and MFIs, if those risks were managed better.
In Burkina Faso, the STARS team has developed five new financial products that meet the needs of producers working in sesame, soy, rice, corn and potato value chains.
“To develop tailor-made loan products, the STARS team invested a lot of time in really getting to know our farmers. Once we understood the cycle of their agricultural activities, costs, risks and benefits, we were better able to analyze their economic performance and predict their capacity to repay their loan,” Lassina Sanou, STARS country lead in Burkina Faso tells. “To help us do that, ICCO Terrafina Microfinance and ICCO Cooperation developed the Agri-Credit Assessment Tool (A-CAT).”
For farmer Lankoandé Hamma this meant he was able to access a loan for the first time in his life in 2019. “The MFI near my village agreed to finance us for the 2019 campaign and I received a loan of USD 165 which allowed me to increase my cultivable area from 1 to 2 ha. This positively impacted my production and income.”
In addition to developing tailor-made individual loans for farmers, STARS developed a sectoral risk management program for MFIs. The objective of this program is to assess the risk management measures already adopted by MFIs. Based on an assessment of the gaps in capacities and internal systems of the MFIs, STARS will design an agricultural credit risk management training manual for MFIs and provide continuous coaching throughout 2020. In addition, together with the MFI, STARS will design strategies, tools and methodologies that help MFIs to better manage the quality of their agricultural lending portfolios and their liquidity.
“We want MFIs to internalize their risk management, which will allow them to better assess their loan risks on a monthly basis, taking into account new risks related to agri-credit, partnership, digitalization, cash flow and liquidity,” Lassina Sanou explains.
To kick off its risk management program, STARS brought together participants from the six partner institutions, government structures and other organizations active in finance in January 2020. With around fifty participants, discussions focused on already existing risk management tools and practices, which can be easily adopted by financial institutions in Burkina Faso. Participants were introduced to international risk management guidelines and tools such as ISO 31000 and the Basel Committee on Banking Supervision (BCBS).
A National Affair
Ms. Biba Corine Nikiema Konseiga, representative of the Minister of the Economy, Finance and Development, was one of the participants of the workshop.
“Access to credit is a concern for the government of Burkina Faso. In April 2019, we adopted the National Strategy of Inclusive Finance (SNFI) which overall objective is to provide access to financial products and services to 75 percent of the population. Risk management will help us promote financing, particularly for the agricultural sector.”
In line with the government’s ambitious goals, STARS has already helped six financial institutions in Burkina Faso (ASIENA, GRAINE SARL, PAMF, URC Nazinon, RCPB and UBTEC) to finance more than 35,000 farmers. STARS’ goal in Burkina Faso is to improve access to finance and markets for 49,500 smallholder farmers.
The Strengthening African Rural Smallholders (STARS) program is a five-year program (2017-2021) implemented by ICCO Cooperation in partnership with Mastercard Foundation. Adopting the market systems development approach, STARS improves access to finance and markets for over 200,000 smallholder farmers with emphasis on women and youth in Burkina Faso, Ethiopia, Rwanda and Senegal.